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Uber will be introducing its first
self-driving cars in Pittsburgh later this month. This first fleet of custom
Volvo XC90s will include trained operators available to take control of the
vehicle if necessary. These vehicles will not be completely autonomous. However,
as the technology in this area progresses, the line between car rentals and
transportation services may become less clear. In states that tax car rentals
but not transportation services, this ambiguity could cause controversy.

The National Highway Traffic Safety
Administration has created 5 categories for classifying motor vehicles based on
the degree to which their functions are automated. On this scale, Level 0
represents vehicles lacking any autonomy. Uber’s ultimate goal – as well as
that of Google, Tesla, Apple and others – is to develop a Level 4,
fully-automated vehicle (i.e., one capable of safely navigating from one point
to another without human assistance). Uber’s self-driving Volvos achieve Level
3 autonomy, falling short of Level 4 based on their need for trained operators,
according to Bloomberg
Businessweek.

As required by the Streamlined Sales and Use Tax Agreement, all 23 states that are full Streamlined Sales Tax members
exclude from their definitions of leases and rentals the provision of tangible
personal property with an operator. Tennessee, the only associate member state,
also excludes the provision of tangible personal property with an operator from
its definition of “lease or rental”. Many non-member states also treat the
provision of tangible personal property with an operator as a service rather
than a lease or rental. New York treats the provision of equipment with an
operator as a service unless the customer has the right to direct the
operator’s use of the equipment.

But what happens when the operator is
removed? While this would certainly remove the transaction from the exception
from leases and rentals for property with an operator, does the transaction
otherwise bear the indicia of a lease? In the case of Uber’s aspired-to
fully-automated car, would the passenger have the requisite possession and
control of the vehicle to be said to be leasing it? Might Uber successfully
argue that it has constructive control over the vehicles based on the fact that
all travel requests are routed through its platform before being sent to a
vehicle? In states like Arizona, which do not tax ridesharing or taxi services,
would this remove the transaction from taxation? Suppose that Enterprise starts
renting fully-automated vehicles, but that instead of travel requests being
routed through a smartphone app, the passenger inputs the destination directly
into the vehicle. This may be more likely to be treated as a taxable lease, but
should the distinction in how the destination information reaches the vehicle make
a difference in taxability?

Like the tug of war that we have seen
between states and taxpayers on software-as-a-service transactions, it may be
that in the not-too-distant future we will see a similar fight over classifying
what might be called “automaton-as-a-service” transactions. And in their
efforts to preserve the tax base, it seems inevitable that states will end up also
expanding it. Suppose that a cleaning company deployed a fleet of Boston
Dynamics’ Atlas robots. Would a
state such as Alabama, which does not tax cleaning services, treat this as a
taxable lease or rental or as a nontaxable service? What about robot massage therapists?

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